Be Afraid of Fear Based Trading
Stockscores Foundation for the week ending February 24, 2020
In this week's issue:
In This Week’s Issue:
- Stockscores Market Minutes Video – When to Buy Weakness
- Stockscores Trader Training – Be Afraid of Fear Based Trading
- Stockscores Feature Strategy – Coronavirus Opportunity
Stockscores Market Minutes – When to Buy Weakness
Coronavirus fears have investors in a selling mood again. This week, I discuss when it makes sense to buy weakness. I then do my weekly market analysis and look at the trade of the week on PGNY.
Click here to watch this week’s Market Minutes
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Commentary of the Week – Be Afraid of Fear Based Trading
Speaking from experience, I have found that most mistakes in trading are the result of succumbing to fear. When I say mistakes, I don't mean losses since losing money on trades is part of trading. Instead, I mean those bad trades that we all take which don't fit in to our trading strategy and plan.
The fear-based decisions that cause us to deviate from our trading rules can be broken down in to two types.
First, the trading decisions that we make because of our fear of losing money. These are usually exit trades; we sell too early for fear that our winner will turn in to a loser. Perhaps we fail to take a trade that fits our criteria because our "common sense" tells us there is something wrong with the trade and that it can't succeed. Maybe we enter a trade later than we should because we want to see the market prove our trading idea correct, only to end up getting in once much of the run has happened.
The second fear-based trading mistakes we make are those that are the result of our fear of missing out. These tend to be on the entry; we take trades that don't quite fit our rules because we focus on what might be, the profits that could happen. It may be that we listen to an "expert" in the media or follow the actions of the crowd and do what the headlines are telling us to do.
Have you ever succumbed to either of these fear-based trading mistakes?
If you are a normal human being, I think it is highly unlikely that you have not. Since they happen to all of us, we need to figure out a solution. Fortunately, the solution is quite simple.
Rather than focus on fear, focus on fact. Make trades based on what is happening, not what you think could happen.
Many have described fear as "future events appearing real". We don't walk down a dark alley at night because we might get mugged. We don't swim in the ocean because we might get attacked by a shark. We don't fly on a plane because it might crash.
When we focus on what might happen, what our fear tells us to do, we typically ignore probability. The probability of getting attacked by a shark is extremely low. Last year, you actually had a greater chance of dying taking a selfie photograph than by being attacked by a shark. If we focus on fact, we get better results.
This does not mean you should ignore fear. It is there to protect us and, when probability is on the side of the decision, it is best to listen to fear. I stopped flying small airplanes because the statistics showed that it was a dangerous thing to do. I still trade stocks because I have strategies that put the statistics in my favor.
When you trade, take your focus off of your emotion and look at the facts. Develop a trading strategy that puts probability for profit in your favor. Have a process in place to assess the facts and take the trades that meet your requirements. Overcome fear in favor of fact.
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Stockscores Feature Strategy - Abnormal Breaks
Coronavirus fears have the market making a big move to the downside today. This is likely an opportunity to buy well liked stocks on sale but since there is a possibility that this could be the start of a more substantial correction, it is important to use good risk management.
As I discussed in this week's Market Minutes, buying stocks that fall sharply in to support is a good strategy to buy the bounce off of support. The market itself is doing that today.
I estimate there is a 30% chance that this won't work, and we will go still lower. Therefore, plan to exit positions if the market fails to hold above support on a daily closing basis. I am using $320 on the SPY as that support zone.
Until the market starts to stabilize, be cautious with buying breaks from good patterns. It is better to trade fear that opportunity right now.
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